2011 PTD 705
ORDER
SYED NADEEM SAQLAIN (JUDICIAL MEMBER).--- Brief facts, necessary for adjudicating the instant appeal, are that the appella nt is a private limited company that derives income from manufacturing bottling and sale of lemon and lime soda beverages. Return of income for tax year 2004 was filed declaring net loss of Rs.4,661 (m) along with statement under section 115(4) of the Ordinance wherein contractual receipts of Rs.108.756 (in) were offered for tax under Presumptive Tax Regime (PTR) as tax of 6% was deducted at source under section 153(1)(c) of the Income Tax Ordinance, 2001 ("the Ordinance"]. The said return of income, containing statement under section 115(4) as well, was treated as an assessment order under section 120(1) of the Ordinance. Subsequently, Additional Commissioner passed order under section 122(5A) on the ground that receipt of Rs.108.756(m) was taxable under Normal Tax Regime (NTR) under section 18 of the Ordinance and not under PTR as final tax liability. The order under section 122(5A) of the Ordinance passed on 11-1-2010 by Taxation Officer/Additional Commission Inland Revenue, Audit-A, Large Taxpayers Unit, Lahore was assailed before learned CIR(Appeals), who rejected the appeal vide Order No.20 dated 26-3-2010.
The following grounds have been taken by the appellant:-
(1) That the order of learned CIR(A) dated 26-3-2010 against order under section 122(5A)/122(1) of Income Tax Ordinance, 2001 dated 11-1-2010 is bad in law and against the fact of the case.
(2) That the CIR(A) committed violation of rule of audi alteram partem by reproducing rebuttal of department without confronting it to the taxpayer and by not reproducing in the order the written arguments of appellant.
(3) That learned CIR(Appeals) erred in confirming unlawful amendment of order deemed to have been passed on filing of statement under section 115(4) of the Ordinance.
(4) That learned CIR(Appeals) erred in not holding order under suction 122(5A)/122(1) as time-barred.
(5) That learned CIR(Appeals) erred in not holding that no legal authority was available to Additional Commissioner to amend either return filed under section 120 or statement filed under section 115(4) of the Ordinance.
(6) That learned CIR(Appeals) erred in not holding that Additional Commissioner lacked lawful authority to amend an order treated to have been passed by Commissioner.
(7) That the learned CIR(Appeals) and Additional Commissioner misread the provisions of sections 2(65), 207, 208, 209 and 210 of the Ordinance.
(8) That the learned CIR(Appeals) erred in confirming reliance of Additional Commissioner on format of return provided under Rule 34 of Income Tax Rules, 2002 which cannot override legal provisions of section 115(4) of the Ordinance.
WITHOUT PREJUDICE TO ABOVE:
(9) That CIR(Appeals) erred in holding 'Non-Compete Fee' taxable under section 18 of the Ordinance being capital receipt.
(10) That the learned CIR(Appeals) and Additional Commissioner misread the provisions of sections 4(4) and 4(5) read with section 169 of the Ordinance.
(11) That the learned Additional Commissioner misread the contract between the parties relating to `non-compete fee'.
(12) That the CIR(Appeals) erred in declaring "non-Compete fee Contract" as invalid document.
(13) That the learned CIR(Appeals) erred in taxation of the amount under the normal law instead of presumptive tax regime when tax was deducted under section 153 of the Ordinance.
(14) That the learned CIR(Appeals) erred in holding "Non-Compete Fee" as revenue business receipt.
3. Both the parties have been heard and relevant orders perused. The AR assailed the order, on two preliminary legal. grounds. He contended that in the first show-cause notice under section 122(5A) dated 6-5-2005, the following error was pointed out:--
"It is evident from bare reading of the above provision that contracts covered under section 153 are those contracts, which are to be executed by the taxpayer, such as construction of building, installation of plant or machinery etc.
It is obvious that your case falls outside the scope of section 153(6). Therefore in your case the deduction of tax cannot be treated as final discharge. Merely, by giving in transaction shape of the contract and enforcing deduction under subsection (1)(c) will not automatically bring it in the ambit of this provision.
4. According to learned AR, a detailed reply was given in response to notice dated 6-5-2005 in which it was conveyed that section 153(1)(c) of the Ordinance is not restricted to contracts relating to construction of building and installation of plant and machinery. According to AR, no response was made by the department till 14-6-2009. However, after more than four years letter No.5532 dated 15-6-2009 was issued in which basis of invoking section 122(5A) was altogether changed and following intention was conveyed:
"This treatment also gets reconfirmed by the fact that Messrs Riaz Bottlers (Pvt.) Limited have amortized this expenditure for purchasing this intangible right over a period of three years under section 24 of the Income Tax Ordinance, 2001. Hence, the said receipt for transfer of an intangible asset (right to manufacture lemon/lime beverages) is taxable under section 37 of the Income Tax Ordinance, 2001. As there is no cost incurred by you in this regard, hence the entire consideration received is taxable under section 37 of the Income Tax Ordinance, 2001. Please also note that various case laws and judgments of the higher courts cited by your AR in the above referred letters are not relevant as the amount is intended to be taxed under section 37 of the Income Tax. Ordinance and not under section 18 of the Income Tax Ordinance, 2001."
5. The learned AR emphasized that in second show-cause notice a clear intention was conveyed that receipts under consideration would not be taxed under section 18 but under section 37 of the Ordinance. However, in the order finally passed, disputed amount was taxed under section 18 of the Ordinance. It is contended that order of the department is void in law as the amending authority passed an order on entirely different basis that what was conveyed in the show-cause notice. It is violative of the law enunciated by honourable Supreme Court of Pakistan in The Collector Central Excise and Land Customs and others v. Rahm Din 1987 SCMR 1840 holding that the order of adjudication if based on a ground not in the show-cause notice it is palpably illegal being void on the face of it. It was also emphasized that original show-cause notice was never withdrawn and proceedings remained in continuation through second letter issued after more than four years. In the second show-cause it was categorically conveyed that section 37 would be invoked and section 18 was not applicable, but strangely in the final order addition was made under section 18 of the Ordinance. The AR further argued that the Amending Authority 'indulged in fishing inquires that was not permissible under the law as held by the Tribunal in 2008 PTD (Trib.) 1491 and I.T.A. 1210/LB/06 dated 26-7-2008.
6. The second legal objection was that Commissioner did not apply his independent mind and therefore order under section 122(5A) was unlawful. It was argued, that order under section 122(5A) was passed in utter violation of the law enunciated by honourable Supreme Court of Pakistan, High Courts and Tribunal in as much that Commissioner, at no stage of the proceeding applied his own independent mind as required under section 122(5A) of the Ordinance.. The AR pointed out that in the latest order by Tribunal (I.T.As. Nos.393 and 270/KB/2010 dated 18-6-2010) re: Karachi Port Trust in Para 36 it is held that Commissioner at least issued letter of initiation of proceedings under section 122(5A). This process was completely missing in this case. The AR relied on following, judgments to pray for declaring order void for want of meeting of requirement of "consideration" by the Commissioner:--
(1) Gadoon Textile Mills and 814 others 1997 SCMR 641.
(2) MA(AG) No. 22/LB of 2009 in I.T.A. No. 1019/LB of 2008 dated 9-5-2009.
(3) 2007 PTD 1226
(4) 2005 PTD (Trib.) 344.
On merits, he said detailed arguments were communicated vide letter dated 4-12-2009 showing that receipt in dispute could only be taxed A under Presumptive Tax Regime, otherwise it a capital receipt not chargeable to tax under section 18. He referred the following cases:
(i) PLD 1978 Kar. 1047 = 1978 PTD 328: The sole-selling agency right of the respondent was undoubtedly an income yielding asset and any payment to take away the source of income described by whatever name is capital receipt not liable to tax.
(ii) 2001 PTD 2829: In this case the honourable High Court while relying on a case reported as 16 ITR 101 accepted the remarks given in that case as:--
"The name given to a transaction by the parties concerned doesn't necessarily decide the nature of the transaction, a transaction which on its true construction is of a kind that would escape tax, is not taxable on the ground that the same result could be brought about by a transaction in another form which would attract tax."
(iii) 2006 PTD 2291: Compensation on loss of any asset from business which was sole source of income of the assessee does not constitute income covered with definition of income.
(iv) 2003 PTD (Trib.) 2321: Any payment to take away the source of income by whatever name may be called is a capital receipt not chargeable to tax.
(v) (1964) 9 Tax 38 (Trib.): A foreign company, carrying on business in Pakistan, employed two managing directors one at Karachi and the other at Chittagong. After some time the Company decide910 close down the business in Pakistan, valued its assets and liabilities from PKR 12,000 on account of compensation reduced the value of assets. The managing director at Karachi who offered the highest bid purchased the establishment of the company and the assessee who resigned was paid PKR 12,000 as compensation but was assessed to tax on this sum as remuneration in respect of past services. On appeal the amount was deleted from assessee treating, the receipt as compensation for loss of employment. The principle decided squarely applies to our case where non-competition fee is in lieu of loss of source of income. We are debarred to produce any like soft drinks competing with the business of payer.
7. The learned DR countered the arguments by asserting that department did not change the basis of invoking section 122(5A) rather taxpayer changed the stance. His contention was that from the beginning the department expressed intention to tax the amount as business income under section 18 that taxpayer wrongly offered for tax under presumptive tax regime. He referred to section 18(1)(d) for the taxability of the amount. On the question of consideration, he also cited the judgment in I.T.As. Nos.393 and 270/KB of 2010 dated 18-6-2010 re. Karachi Port Trust. In his rebuttal, AR specifically read Para from second notice that was issued after more than four years wherein department specifically conveyed the intention of invoking section 37 instead of section 18.
8. We have considered the arguments of both the parties, facts and case law. In the original notice under section 122(5A) the sole ground for revision was that receipt of Rs.108,756 (m) from Riaz Bottlers did not fall under section 153(1)(c) because only construction of building and installation of plant and machinery are covered in the said provision. However, in the second show-cause notice issued after more than four years an altogether different stance was taken as reproduced above. In the final adjudication order, the Additional Commissioner applied section 18 in taxing the amount, whereas it was specifically conveyed in the second notice that the said section was not applicable. The taxpayer, has consistent stance from the beginning that amount is capital receipt, not chargeable to tax under section 18, but liable to tax under presumptive tax regime that makes no distinction between capital or revenue receipt.
9. The deviation by the Additional Commissioner in passing order from the grounds mentioned in show-cause notice(s) is violative of law laid down by honourable Supreme Court of Pakistan in 1987 SCMR 1840. It is categorically held by the honourable Supreme Court that ".... the order of the adjudication being ultimately based on a ground which was not mentioned in the show-cause notice, the order was palpably illegal and void on the face of it". The ratio plies squarely to the facts of the case in hand.
10. Since the department issued various notices under section 122(5) on different grounds and kept on going for enquiries, the proceedings under section 122(5A) were void as held in ITA 1210/LB/06 dated 26-7-2008 and 2008 PTD (Trib.) 1491. In both the cases, it is held that fishing inquires are not allowed while exercising revisional jurisdiction and section 122(5A) in not maintainable if based on surmises and conjectures. In this case, the allegations levelled for invoking f section 122(5A) were changed in the very second notice issued after more than four years of the original show-cause notice. In the second notice it was conveyed that section 37 is applicable and cases cited for non-taxation of capital receipt are not relevant. In other words the department admitted that amount is capital in nature, but taxable as capital gains. However, in the final adjudication, order, the amount is taxed as "revenue receipt chargeable under section 18 of the Ordinance.
11. The final adjudication on a point different from mentioned in original notice and second notice is violation of law. It proves that allegations regarding erroneous and prejudicial to the interest of revenue were based on surmises and conjectures. For the purpose of revisional jurisdiction, the allegation should be definitive and supported by evidence. In this case, the amending officer changed the very nature of allegation in second notice issued under section 122(5A) issued on 15-6-2009 vide Letter No.5532 and then passed the order other than on the ground mentioned therein. The initiation of proceedings under section 122(5A) on a particular ground and its conclusion on a different ground that was never confronted cannot be lawful. This is established position of law as enunciated by honourable Supreme Court in 1987 SCMR 1840.
12. As regards the second legal objection that the Commissioner did not apply his independent mind, we are in agreement with AR that assessment cannot be amended under section 122(5A) without conscious application of mind by Commissioner himself. This is a legal obligation imposed on the Commissioner by law itself. If legislature imposes a personal obligation on an authority then the same authority is required to discharge that legal obligation. The obligation cannot be passed on to anybody else. The following cases are direct authority on this issue:
(i) MA (AG) No.22/LB/09 in ITA No.1019/LB/08 dated 9-5-2009 "we are in agreement with the arguments of the learned AR that assessment completed under section 120(1), has been amended by the Additional Commissioner of Income Tax, under section 122(5A) of the Income Tax Ordinance, 2001, without conscious application of mind by the Commissioner of Income Tax. The powers under section 122(5A) vest with the Commissioner of Income Tax on the basis of his personal examination and consideration of the case himself. It needs hardly be emphasized that, before the power under section 122(5A) is exercised or delegated, the Commissioner must be satisfied on the materials on record that the order being erroneous has caused prejudice to the interest of revenue or likely to cause such a prejudice."
(ii) 2007 PTD (Trib.) 1226
"It is clear by the reading of section 122(5A) of Income Tax Ordinance, 2001 that only Commissioner has been vested with the jurisdiction to take action under section 122(5A) on the basis of his personal examination and consideration of the case himself. It needs hardly be emphasized that before the power under section 122(5A) is exercised or delegated; the Commissioner must be satisfied on the materials on record that the order, being erroneous, has caused prejudice to the interest of the revenue or was likely to cause such a prejudice."
(iii) 2005 PTD (Trib.) 344
"Bare reading of section 66-A, clearly spells out that the powers of the IAC to invoke the provisions of this section are wholly solely and exclusively dependent upon consideration by himself which must be based on objective basis."
13. It is, now an authority of Supreme Court in CIT v. Eli Lilly Pakistan (Pvt.) Ltd. and others 2009 SCMR 1279 = 2009 PTD 1392 that proceedings under section 122(5A) are revisional in nature. It is cardinal t principle of law that revisional jurisdiction cannot be exercised by same person let alone by a subordinate authorities. In Sandal Engineer (Pvt.) Ltd. v. IAC 2001 PTD 1467 the honourable Lahore High Court, Lahore held as under:--
"As a rule revisional jurisdiction is never exercised by the same authority. The power to revise, be it suo motu or on the application or an aggrieved party, necessarily involves the consideration of the impugned order by a person or authority placed higher in the hierarchy to adjudge its legality and propriety. The jurisdiction so conferred normally has a colour of supervisory power to correct mistakes on administrative side. Once an authority has passed an order it cannot act in revision on the same order to pick up faults and to interfere with by taking a different view of the issues involved. The power to revise an order is clearly distinguishable from review and rectification. Besides other things, on common feature of them being that both review and rectification are normally made by the sane authority which had earlier passed the order in question."
14. The honourable Supreme Court of Pakistan in Messrs Gadoon Textile Mills and 814 others v. WAPDA and others 1997 SCMR 641 held at page 799 [para. 40] that "where a statute directs that certain acts shall be done by a specified person their performance by any other person is impliedly prohibited". It has been held by honourable Supreme Court of Pakistan that any authority vested with the power or discretion is duty bound to exercise the same by himself by applying his independent mind not influenced by extraneous consideration. He should neither accept any dictation nor delegate his authority to any other person. Violation of these rules, it is categorically held by Supreme Court of Pakistan, will render the decision illegal. Needless to say that this order of Supreme Court of Pakistan is binding under Article 189 of Constitution of Republic of Pakistan and any contrary judgment of any authority including this Tribunal will have no binding force. In this case, it is admitted by the department that at no stage of the proceedings, the Commissioner applied his independent consideration to adjudge -that original order is erroneous and prejudicial to the interest of revenue. On this account also order under section 122(5A) is not sustainable in law.
15. Since we have declared the proceedings under section 122(5A) being void ab initio and order passed unlawful on the face of it there is no need to adjudicate the grounds on merit regarding chargeability of the receipt. The order passed under section 122(5A) is hereby declared null and void.
16. As regards, merits of the case, as to whether the amount received on termination of agency rights, is a capital or revenue receipts, the appellant has prima facie a very strong case in his favour. After hearing the rival contention put forth, we have come to an un-escapable conclusion that the ratio and the principle laid down in the case-law cited at the bar, equally attract to the appellant's case.
17. Since we have adjudicated the appellant's appeal on legal plane, so there is no need to dilate upon the aforesaid issue from that single.
C.M.A./8/Tax(Trib.) Appeal accepted.